2 March 2015 – The Sun Daily
FRANCHISING a business is a proven course for rapid growth. With the right framework, franchising can be a successful expansion strategy without requiring as much up-front capital. However, becoming a successful new franchisor requires detailed consideration of the laws that heavily regulate the franchise industry. This article provides an introduction to the regulatory regime of the franchise industry in Malaysia.
The Law and its Scope
The franchise industry in Malaysia is mainly governed by the Franchise Act 1998 (“Act”) which incorporates the amendments in the Franchise (Amendment) Act 2012 which came into force on Jan 1, 2013 (“Amendment Act”).
The Act provides an extensive definition of a franchise. In general terms, a franchise refers to an agreement where the franchisor grants the franchisee the right to use its trademark and to operate the franchisee’s business according to the franchisor’s franchise system for an agreed fee.
The franchisor is required to register his franchise with the Franchise Registry before he may operate or offer the sale of the franchise. An application can be submitted through the Malaysian Franchise Express portal at http://myfex.kpdnkk.gov.my/portal/. Prior to registration, the franchisor must have operated at least one outlet for 3 years.
In addition, franchisees are required to register their franchise with the Registrar within 14 days from signing of the franchise agreement.
The Franchise Agreement
As part of the registration requirements, the Act requires a copy of the franchise agreement to be submitted to the Franchise Department for approval before it is signed between the parties.
The Act also provides for certain mandatory provisions to be included in the agreement. Failure to include these provisions will render the franchise agreement null and void. Some of the provisions are:
Confidential information and prohibition against similar business
The franchisee must provide to the franchisor a written guarantee that during the term and for two years after the franchise agreement has ended, the franchisee, its directors and their spouses and immediate family, and its employees will not disclose confidential information or engage in businesses similar to the franchise operated by the franchisor.
Cooling off period
A franchise agreement must also provide for a cooling off period of not less than seven working days during which the franchisee has the option to terminate the agreement and be refunded all monies paid to the franchisor, save for reasonable expenses incurred by the franchisor in preparing the agreement.
Extension of franchise term
The Act stipulates a minimum term for a franchise which is five years with an option for the franchisee to renew the agreement on similar conditions for a further term. Save where the franchisee has breached the terms of the previous franchise agreement or where the franchisee gives the franchisor a written notice of his intent not to renew the franchise agreement, the franchisor may only refuse to renew the franchise if he agrees to compensate the franchisee.
Alternatively, the franchisor may waive any provision in the franchise agreement which prohibits the franchisee from conducting substantially the same business under another trade mark in the same area prior to the expiration of the franchise agreement.
Under the Act, a franchisor may not terminate a franchise agreement before the expiration date except for “good cause”. An example a “good cause” is when a franchisee fails to remedy a breach after the franchisor has given a notice of, and an opportunity to remedy, a breach.
Where a franchisee is required to make payment for the purpose of the promotion of the franchise, the franchisor must establish a promotion fund to be managed under a separate account, used solely for the purpose of payment by franchisees for the promotion of the product under the franchise.
The franchisor must submit an annual report to the Registrar in the prescribed form within 6 months from the end of each financial year of the franchise business. The Amendment Act allows the Registrar to cancel the registration of the franchise on its own accord if the annual report is not submitted.
Advertisement of franchise
Any person who wishes to publish, distribute or use any advertisements offering to buy or sell a franchise is required to file a copy of the advertisement with the Registrar at least five days before the first publication, distribution or use of the advertisement.
The legal framework of franchising in Malaysia brings greater protection for Malaysian businesses. Through proper implementation, the Act will encourage innovation and economic growth. Accordingly, franchisors should be aware of the laws in place to establish systems that minimise the risks involved in the competitive market.
This is an overview on the legislative requirements in setting up a franchise based on an analysis of the Franchise Act 1988 and how it will apply to businesses looking to set up franchises in Malaysia.
Contributed by Philipp Lum See Yau of Christopher & Lee Ong (www.christopherleeong.com).